Opinion

Low interest rates not fair for all

When the Reserve Bank announced it was dropping the interest rate and the banks, to some degree, followed suit, there was some joy out there in the community.

The economists said that softening the fiscal environment was good for us. They said that the drop in the value of the dollar was good for trade and that it should fall further.

But hang on… While I’m no economist, I reckon I have to pay more for everything because what I could get for a dollar yesterday, I have to pay more than a dollar today. In simple terms, my dollar isn’t worth as much.

One good aspect though is that for people wanting to get into their own homes or those on crippling variable mortgages, they’re going to be a little bit better off each month. So for the great Aussie dream, it is good news. When I was a young parent, with a mortgage of 17 per cent, any reduction was meaningful in our lives.

Have you noticed how the prices for overseas goods like clothes and white goods have gone down because the dollar has dropped? Me neither!

Drops in interest rates appear to impact three parts of our community: the working young; the middle group where salaries and wages are ok, the finalising of mortgages is in sight, disposable and discretionary income is ok and the quality of life is reasonably good; and the retired cohort either on fixed pensions of self-funded retirees.

For the purpose of this view, I’ve ignored those on high incomes and those below the poverty line dependent on pensions, because the rich don’t think about prices (they just get what they want when they want it) and the people on benefits never have enough disposable income.

I’m a bit mystified as to how people are better off when they have a lower mortgage repayment eaten up by deterioration in the purchasing power of the mighty dollar. One would hope that they come out at least even and maybe a bit in front. This seems to be the lot of the working young.

The middle cohort are usually in a financial situation where they can ride out the fluctuations in fiscal fortune and cut their cloth or expand it out whenever the economic fortunes wax and wane. When I was in mid-career in the public service, I didn’t take that much notice of the global financial situation, I didn’t take much notice of how the dollar went up or down, I just noted that bread, petrol and smokes went up every year. That was how it was but my life style didn’t change all that much and I wasn’t on a high income either.

Now that I’m in my advanced years I associate with a number of people who are self-funded retirees. Many of them are articulate, well read and their views are to be taken seriously. I also see from time to time seniors’ journals and newsletters discussing the lot of retirees of both types.

Older citizens are either on the pension, live off superannuation at an income level considerably less than they had when in the workforce, or spend the returns on investments such as SMSFs or the share market. Some live off the returns on real estate investment, but not many.

Those on the age pension are at the mercy of the government of the day when it comes to the cost of living adjustment. Setting the pension at CPI increases or AWE increases still means pensioners don’t have any control over their pensions, the government of the day does.

Superannuants are in a similar position to “the pensioners”. The schemes dictate the percentage rise each half year. The others depend heavily on the market place where interest rates are pivotal. If the rates stay low, the income of the self-funded retiree stays low.

The interesting bit now is that we have an increasing ageing cohort who are living longer and have reasonably high health costs. Often their lifestyle is less expensive but their health costs are significant. Funnily, this same situation faces the working young families. Their lifestyle is less expensive because they don’t have a lot of disposable income and the costs of raising children (how I hate that term – it’s like cattle) are high and also have attendant high health costs.

But the governments of the day trumpet the benefits of low interest rates which are helping the young working families but evade the truth of the deterioration of quality of life for the retiree cohort. I don’t know where the middle ground is and where all three cohorts can get a fair share.

Perhaps I should have studied economics instead of defence and strategic studies, politics and history.

In addition to the All Ords you also need to factor in dividends which are another 4-6% p.a. on top of the index. The people who lost with the GFC are those who bought into the share market in a big way in the 12 months before it hit, when it was over valued, and those who sold out in the 12 months after it hit, thus missing out on the inevitable rebound in prices.

The principles of smart investing are that you buy a little each year, you hold a diversified portfolio to minimise risk and you don’t try to time the market, which is akin to “scientific” gambling. I started an investment in 2012 with a small lump sum and have been adding to it each month since then. The rate of return has been in excess of 15% p.a. Retired people I know who started drawing a pension from super some years before the GFC hit have balances in their super now that are around the pre GFC level and they have been drawing pensions the whole time. I don’t have the time for a full dissertation on investment theory but anyone who was properly invested in the market before the GFC and didn’t panic sell hasn’t lost in a significant way, and the longer term higher returns of being invested in the market mean they will have more comfortable retirements than those invested in cash.

Regarding advisors, there are good ones out there. Firstly talk to independent advisors, not ones with conflicts of interest, ie any advisor locked into only recommending certain products. I would be very reluctant to go to a financial planner whose firm is owned by a financial product supplier. Secondly, meet with more than one and get a good understanding of their investment philosophies. Investors need to have a basic understanding of the markets they’re invested in or they’re likely to make the wrong decision when times get tough, and they’ll be the ones who lose out.

I am aware of how it is done.

The trouble is with the “Ifs”.

If you got into the market at the right time, of course you do well. Avoiding the crash or coming in after the crash, or being in so long before the crash you could take the hit, but not everyone was so lucky.

If you had reached the point of retirement at the wrong time, there is no further reinvestments to compensate. Don’t forget reinvestment only tops it up, the initial bad investment stays bad. You are effectively taking your loses on the bad investment and moving on to new investments if you can.

If you don’t get into the market now when the returns are not anywhere high enough and have a serious risk of becoming GFC mark II.

If your investment advisor is honest and tells you about his conflicts of interest. The most successful ones by definition don’t tell you that, also the trailing commissions have been sucking the life out of many people’s super and don’t get announced. Hint don’t use the ones wearing the balaclavas, they are stupid as well as dishonest. Use the one wearing the Armani suit and all the promises, who initially answers the phone.

If your investment advisor tells you who is employing him and for what reason. There is a reason the Banks have been making a mozza, and most people are being captured by the heavily promoted tame investors run by the banks and the larger institutions, who are bribed, sorry “receive commissions”, to get their recommendations.

If the government of the day listens to the concerns of investors rather than the financial advisors or large institutions. So who is making the big donations and employs the high priced lobbyists? Why it’s you!!

This has been a long term festering sore, along with the bleeding obvious problem of the initial lack of choice or consolidation of super, when Keating started the compulsory super system.

It is a huge pool of money, with management that is largely invisible to the owners of the money and has been a very tempting target for anyone who wants it for themselves. Which they have done, bleeding it off at multiple points.

I knew Ken Done, who I always thought was a very smart business man. He put his considerable life earnings into the hands of financial advisors with the instruction to get an adequate rate of return and to retain the capital. They reduced I think it was $26 million down to a couple of million and he was forced to take them to court. Not everyone is in that position but there were plenty of people who were taken to the cleaners by the Big Banks advisors, who were egged on by management.

The great thing about impoverished investors is that they end up fighting the people who took it off them and are using the superannuate’s money to fend off the superannuate trying to get it back. With luck, no-one ends up with the money except the lawyers.

Telstra 3, one of the great “Mum and Dad investments”, still has not got back to the price of the float in 2006. NINE YEARS LATER.

WRONG

T3 which floated in November 2006 had an issue price of $3.60, payable in 2 instalments of $2.00 (October 2006) and $1.60 (May 2008). Investors who held their shares and paid both instalments also received bonus shares of 4% of the original allotment. This gives an average buy in price of $3.46.

Dividends paid on those shares now totals $2.40 fully franked.
Current share price is over $6.00.

Cost $3.46
Total Return $8.40 if sold now giving a profit of $4.94 per share. Annual profit of over 10%.

You may be getting confused with to T2 from 1999 with a float price of $7.40 but even that has turned out to be a reasonable investment for those who’ve held on. Total dividends paid is now $4.08 so total return if sold now would be over $10 not including the potential return of the $4.08 paid in dividends.

The very low official interest rates are a fine example of swings and roundabouts – some people gain, while other people lose – and the net benefit to the economy is looking increasingly marginal with every RBA cut.

Had the move to lower interest rates been tied to a requirement for our banks to phase down (preferably phase out) their high dependence on foreign borrowings, there could have been real benefits to our economy. It would have taken some of the pressure of the exchange rate (thus making our export focused businesses more competitive) and, most importantly, would have made our banks somewhat more secure and stable, and less dependent upon the Government guarantee.

In reality, the government guarantee is worthless.
We owe half a trillion dollars and face years of borrowing so if the banks fail how is the government going to honour the guarantee?
If interest rates get any lower the “rate for risk” equation will topple so people will withdraw their cash and squirrel it away or buy bullion and hold it physically.

It better not be. Imputation is not the problem. The problems are the Liberals making super tax free for people over 60 (unsustainable with an aging population), Labor implementing the big personal tax cuts that both parties promised going into the 2007 election (inflationary as the economy was already close to full employment), Labor bringing in its Fair Work Act that pushed low incomes up too fast (disincentive to employ), Labor spending to try and fix the GFC (keeping interest rates too high and pushing up the dollar which smashed exporters and made imports too cheap for manufacturers to compete with) no party having the guts to tackle negative gearing (keeping housing prices artificially high which held back the RBA from lowering rates earlier) and the Liberals starting to spend on climate action despite getting rid of the carbon tax and keeping the compensation (the carbon tax was way too high, but it should have been retained at a lower level to fund direct action). I could also add in both parties keeping big child care rebates rather than making child care tax deductible for the lower income spouse (incentive for more productive parents to get back into the workforce and less productive parents to stay home, opening up entry level jobs for unemployed youth).

There are far too many career politicians in our parliaments and far too many wannabe career politicians advising them.

“The problems are the Liberals making super tax free for people over 60 (unsustainable with an aging population),…..”
Would you prefer to see these people on the taxpayer funded age pension?

The system as it worked before was that superannuation income was subject to concessions but still taxed. I think it worked out with a single retiree able to earn $35,000 p.a. before starting to pay tax and a couple earning more than $50,000. These were in the days when the effective tax free threshold was $18,000 – so someone working started paying tax from that point.

We’re now in a position where thousands of Australians have super balances in excess of $5m, and there are 200,000 with balances of more than $2m. Under the current rules a person drawing a pension from a $5m super fund will receive $250,000 p.a. and the fund will earn another $150,000 to maintain its capital value in the face of inflation of 3%. The total income tax paid by these people and their funds is $0. I think that minimum wages are too high, but how fair is it to tax someone working to earn $33,000 p.a. when people earning $400,000 p.a. on investments are paying $0?

The superannuation system was designed to assist people to provide for their own retirement, but making it tax free for people over 60 has allowed thousands of the more wealthy amongst us to stop paying income tax altogether. There is plenty of scope to reduce the superannuation concessions for the very top end of town while still providing incentives for the majority to contribute to their own retirement.

It better not be. Imputation is not the problem. The problems are the Liberals making super tax free for people over 60 (unsustainable with an aging population), Labor implementing the big personal tax cuts that both parties promised going into the 2007 election (inflationary as the economy was already close to full employment), Labor bringing in its Fair Work Act that pushed low incomes up too fast (disincentive to employ), Labor spending to try and fix the GFC (keeping interest rates too high and pushing up the dollar which smashed exporters and made imports too cheap for manufacturers to compete with) no party having the guts to tackle negative gearing (keeping housing prices artificially high which held back the RBA from lowering rates earlier) and the Liberals starting to spend on climate action despite getting rid of the carbon tax and keeping the compensation (the carbon tax was way too high, but it should have been retained at a lower level to fund direct action). I could also add in both parties keeping big child care rebates rather than making child care tax deductible for the lower income spouse (incentive for more productive parents to get back into the workforce and less productive parents to stay home, opening up entry level jobs for unemployed youth).

There are far too many career politicians in our parliaments and far too many wannabe career politicians advising them.

Your not wrong about career politicians and populace decision making.

I’ll add 2 to your list if I may :

1) John Howard dishing out income tax cuts, to buy votes) off the back of mining boom revenues that did not last.

The earlier Howard income tax cuts stimulated the economy, helped it grow and reduced unemployment. Those proposed going into the 2007 election are the ones I had a problem with as unemployment was already about as low as it goes so they were just going to be eaten up with inflation, which proved to be the case.

It better not be. Imputation is not the problem. The problems are the Liberals making super tax free for people over 60 (unsustainable with an aging population), Labor implementing the big personal tax cuts that both parties promised going into the 2007 election (inflationary as the economy was already close to full employment), Labor bringing in its Fair Work Act that pushed low incomes up too fast (disincentive to employ), Labor spending to try and fix the GFC (keeping interest rates too high and pushing up the dollar which smashed exporters and made imports too cheap for manufacturers to compete with) no party having the guts to tackle negative gearing (keeping housing prices artificially high which held back the RBA from lowering rates earlier) and the Liberals starting to spend on climate action despite getting rid of the carbon tax and keeping the compensation (the carbon tax was way too high, but it should have been retained at a lower level to fund direct action). I could also add in both parties keeping big child care rebates rather than making child care tax deductible for the lower income spouse (incentive for more productive parents to get back into the workforce and less productive parents to stay home, opening up entry level jobs for unemployed youth).

There are far too many career politicians in our parliaments and far too many wannabe career politicians advising them.

“The problems are the Liberals making super tax free for people over 60 (unsustainable with an aging population),…..”
Would you prefer to see these people on the taxpayer funded age pension?

The very low official interest rates are a fine example of swings and roundabouts – some people gain, while other people lose – and the net benefit to the economy is looking increasingly marginal with every RBA cut.

Had the move to lower interest rates been tied to a requirement for our banks to phase down (preferably phase out) their high dependence on foreign borrowings, there could have been real benefits to our economy. It would have taken some of the pressure of the exchange rate (thus making our export focused businesses more competitive) and, most importantly, would have made our banks somewhat more secure and stable, and less dependent upon the Government guarantee.

It better not be. Imputation is not the problem. The problems are the Liberals making super tax free for people over 60 (unsustainable with an aging population), Labor implementing the big personal tax cuts that both parties promised going into the 2007 election (inflationary as the economy was already close to full employment), Labor bringing in its Fair Work Act that pushed low incomes up too fast (disincentive to employ), Labor spending to try and fix the GFC (keeping interest rates too high and pushing up the dollar which smashed exporters and made imports too cheap for manufacturers to compete with) no party having the guts to tackle negative gearing (keeping housing prices artificially high which held back the RBA from lowering rates earlier) and the Liberals starting to spend on climate action despite getting rid of the carbon tax and keeping the compensation (the carbon tax was way too high, but it should have been retained at a lower level to fund direct action). I could also add in both parties keeping big child care rebates rather than making child care tax deductible for the lower income spouse (incentive for more productive parents to get back into the workforce and less productive parents to stay home, opening up entry level jobs for unemployed youth).

There are far too many career politicians in our parliaments and far too many wannabe career politicians advising them.

Your not wrong about career politicians and populace decision making.

I’ll add 2 to your list if I may :

1) John Howard dishing out income tax cuts, to buy votes) off the back of mining boom revenues that did not last.

I never made a claim that Super funds grew during the GFC, I said that balanced funds have averaged 6-7% over a timeframe that includes the GFC.

ie. The GFC losses are offset by the large gains before and afterwards. You do know what average means yes?

The problem is people assumed that the 15-20% returns they were getting in the years leading up to the GFC were normal when they were clearly above average.

“I don’t really care how you want to invest your money but if you look at most superannuation funds, their balanced options have averaged 6-7% over the last 10-20 years, WHICH INCLUDES THE PERIOD OF THE GFC.” It is certainly not true over the last 10 years, which had only a 3.5% per annum growth rate and an average 3.13% inflation rate over the same period.

Work out what you’d have left after inflation and whatever marginal tax you have been paying.

You sure sound like a financial advisor. Your assurances are selectively applied after the event.

Anybody can cherry pick their periods, and guess what THEY DO! Why not choose the last 40 years? The last 60 years? What if you simply happen to be living and investing in the wrong 10 year period?

The fact remains that the market has not grown a jot in the last 8 year period. We are just back to where we were in 2007, only with more debt, more of our enterprises sold, more dependent on other nations and more structural problems than ever before.

Both Blind Freddy and I saw the sh!tfest coming and got out about 18 months before the crash, went to cash and kept my property. Blind Freddy could see the inevitable happening, but financial advisors showed their prognostication skills, yet again, by once more getting it SPECTACULARLY wrong.

How many times have you heard the profundity: “This time it is different!”

The “recovery” is IMHO not a recovery, it is a continuation of the same stupidity, largely funded by the U.S. Treasury’s “Quantitative Easing”. The biggest swap of paper for dubious debt in the world’s history.

When you are simply printing money you can always fool the endless supply of fools out there by calling it something ridiculous that they don’t understand (which is virtually everything).

The only real economy out there is the Chinese Economy, because they are in fact creating a lot of assets and have all the huge resources in material (much stolen from Tibet, the rest bought from us), human resources in both numbers and education, and intelligent technocratic management.

We have ridden on the Chinese coat tails and squandered most of it on imported oil to feed the bloated gas guzzlers to ride on all the freeways, luxury goods, trips overseas, and the world’s most obese housing stock, mostly located in “rural suburbia”.

It better not be. Imputation is not the problem. The problems are the Liberals making super tax free for people over 60 (unsustainable with an aging population), Labor implementing the big personal tax cuts that both parties promised going into the 2007 election (inflationary as the economy was already close to full employment), Labor bringing in its Fair Work Act that pushed low incomes up too fast (disincentive to employ), Labor spending to try and fix the GFC (keeping interest rates too high and pushing up the dollar which smashed exporters and made imports too cheap for manufacturers to compete with) no party having the guts to tackle negative gearing (keeping housing prices artificially high which held back the RBA from lowering rates earlier) and the Liberals starting to spend on climate action despite getting rid of the carbon tax and keeping the compensation (the carbon tax was way too high, but it should have been retained at a lower level to fund direct action). I could also add in both parties keeping big child care rebates rather than making child care tax deductible for the lower income spouse (incentive for more productive parents to get back into the workforce and less productive parents to stay home, opening up entry level jobs for unemployed youth).

There are far too many career politicians in our parliaments and far too many wannabe career politicians advising them.

Current All Ords is 5861.9, less than it was over eight years ago in March 2007.

All that time you have been paying in to your super fund, even when it was bleeding money, and always paying the fees for the advice that was supposed to make a difference.

Like either you or the “financial advisor” are smarter than everyone else, you can beat the odds.

You are not a helpless individual adrift in a sea subject to the winds, the tides and the storms.

Like 80% of all gamblers you imagine yourself as a “Winner” and ignore the real Winners, those who take advantage of your delusions.

In addition to the All Ords you also need to factor in dividends which are another 4-6% p.a. on top of the index. The people who lost with the GFC are those who bought into the share market in a big way in the 12 months before it hit, when it was over valued, and those who sold out in the 12 months after it hit, thus missing out on the inevitable rebound in prices.

The principles of smart investing are that you buy a little each year, you hold a diversified portfolio to minimise risk and you don’t try to time the market, which is akin to “scientific” gambling. I started an investment in 2012 with a small lump sum and have been adding to it each month since then. The rate of return has been in excess of 15% p.a. Retired people I know who started drawing a pension from super some years before the GFC hit have balances in their super now that are around the pre GFC level and they have been drawing pensions the whole time. I don’t have the time for a full dissertation on investment theory but anyone who was properly invested in the market before the GFC and didn’t panic sell hasn’t lost in a significant way, and the longer term higher returns of being invested in the market mean they will have more comfortable retirements than those invested in cash.

Regarding advisors, there are good ones out there. Firstly talk to independent advisors, not ones with conflicts of interest, ie any advisor locked into only recommending certain products. I would be very reluctant to go to a financial planner whose firm is owned by a financial product supplier. Secondly, meet with more than one and get a good understanding of their investment philosophies. Investors need to have a basic understanding of the markets they’re invested in or they’re likely to make the wrong decision when times get tough, and they’ll be the ones who lose out.

Why are you assuming that all retirees have to live off fixed interest investments and must preserve the capital of their investments wholly?

It seems like investment advice might do them better than higher interest rates.

Have you seen how volatile the share market is?
“Blue chip” bank shares have plummeted in the past weeks and while they are still paying franked dividends this may not be forever.
Most super funds have now clawed back the capital losses that were incurred in 2007-2008 but they will never claw back the investment returns that were lost since then.
I was appalled to hear several of my friends say they were happy having bank shares in their super because they would be the first to be paid out if there was a corporate failure. I could not convince them that they were totally wrong and the guy who cleaned the toilets in the banks would be paid before them and there is usually nothing left for the shareholders.
Most retired people do not want to take chances with their money in retirement – stellar investment return while exposed to chances of losses is not as important as preservation of capital which should be drawn down commensurately with ageing (you can’t take it with you).

That’s my point, Super funds have produced those returns over the long term including the periods of the GFC and other crashes. You say they haven’t clawed back their pre GFC returns but these 10% + returns were clearly above average. Most people are retired for 20+ years, the idea that they need to be so conservatively invested is simply wrong.

If a retired couple can live with dignity on $50,000 a year from an investment of $1 million, why encourage them to gamble it all to make more money? How are retired folk going to spend more than $50000 a year?
If they do gamble it all and get rich the ultimate outcome will be “wealthiest retirees in the cemetery”.
And forget any thought of their offspring getting it all as the Government will have some sort of death duty in place as early as tomorrow.

In his attempts to show me how his “scientific charting” was working for him, he showed me his trading spreadsheet. I don’t think he meant for me to see his bank account. I certainly noticed what Charting was doing to that.

Thankfully he has a very substantial income to feed his investments, plus that old speculative standby, property.

I remember charting back in the day pre computers. That time I had a friend who was very much into the whole get rich quick thing.

It seems to come around every 20 years or so and it always seems too good to be true

Amendments to give renters more rights have passed the Legislative Assembly. It will be easier for renters to keep a pet, make minor modifications to their rental property, and to break a lease without incurring significant costs https://t.co/UG9YEv9ilQ(5 hours ago)